It isn’t just about raw materials or other components, about which many manufacturers are complaining. While the Shenzhen-based company noted in its release it has made adjustments to certain car models to deal with the fluctuating prices of raw materials such as lithium, nickel and cobalt, the tougher obstacle is the cost of making its high-tech powerpacks.
BYD’s challenge shows how hard it is to produce batteries at scale — even if the technology is superior — and why that will become one of the main stumbling blocks in the near-term as demand surges.
Compared to the world’s largest maker of batteries, Contemporary Amperex Technology Co., BYD’s technology is more advanced with its Blade powerpack, which it says may be used in some Tesla Inc. vehicles. The innovative form factor — or the shape, size and physical characteristics of the hardware — allows heat to be dispersed more evenly, which is a big advantage, given the risk of fire. Because it’s so long (about a meter, compared to about half of that for competitors) but narrow, it’s more efficient in terms of space and that ends up giving it a higher energy density.
The materials of BYD’s battery parts are about 5% cheaper than CATL’s and those ensure it consumes almost a quarter less electrolyte — the substance that allows electrical current flows from the anode to the cathode — and it costs less, too, analysts at UBS Group AG have noted. This is what manufacturers globally are vying for.
Here’s the issue, though: The price of the battery’s packaging or housing is almost 30% above CATL’s. In addition, the manufacturing cost is 21% higher because of its architecture, according to UBS analysts. The Blade uses the so-called stacking way for its electrodes, meaning the anode, separator and cathode are set up like a “deck of cards,” as UBS puts it. CATL’s, on the other hand, use the winding process, a tried and tested method that manufacturers have been using for a while. In the long run, stacked electrodes are likely to be winners because the energy gets spread out more evenly. But right now, it’s expensive.
The cost of technology and research and development is high, even as a portion of sales when compared to CATL. It’s a good thing the firm is a beneficiary of several Chinese government grants and subsidies. In 2021, it received 4.48 billion yuan ($650 million) and 2.26 billion yuan the year before. BYD’s operating margin for batteries trails CATL and its South Korean peers. Nomura Holdings Inc. analysts expect it to follow that trend for the next five years.
Over the past four years, CATL, with almost 40% of the global battery market, has scaled at a much faster pace in terms of total battery capacity than BYD, with a 13% share. Even compared to South Korea’s LG Energy Solution, it’s been slower to bring on gigawatt hours. It’s tough to go big if the manufacturing costs are so high because it isn’t easy to set up the processes quickly. This is also likely to make it difficult to deploy cars and batteries overseas in a big way, not just in China and for large electric buses as BYD currently does. No wonder even Berkshire is now starting to pare back its stake. A filing Tuesday showed Buffett’s firm had reduced its more than a decade-old holding, after much speculation that it was preparing to do so in July.
All told, BYD’s innovative and longer-term potential for success has steep costs right now. Those are getting in the way of its ability to scale as fast as its largest peer. The trade-off between expenses, technology and scale that BYD is dealing with are a real warning to all the battery firms — and EV makers — touting the best-in-class technology that’s going to break barriers in the near term: Now more than ever, it’s all about costs.